Is this a good deal?

9 Replies

Hello, Bigger Pockets!

After listening to the podcast and reading books and blogs, my husband and I are looking for our first investment property. (Yay!) It will be a buy and hold rental and we're looking at small older homes in an area about half an hour from the city. (Reidsville, NC) We've found a 2 bed 1 bath house built in 1945 that's been kept in great condition with original hardwoods, cabinets, and cast iron tub. Unfortunately, all the electrical components are also original. Fuse box and all. Only one outlet in the house even has a place to plug in a ground. Is this something that would need to be updated right away? Or with a house so small would it be able to take the load? If anyone has any experience with old electric, any advice would be great!

Thankyou!

If you're interested in the numbers, we would make an offer at 50k and with that plus all the operating expenses (including property management) we could get $193 a month in cash flow, and about 15% cash on cash.

I'm assuming the home would have knob and tube wiring which I believe you can technically leave in place if you aren't doing any major renovations (check your state laws).  One thing to be aware of that I have had happen is the tenants may go to Home Depot and buy plugs with grounding pins and have them installed so that they can plug in electronics that have a grounding pin.  THIS DOES NOT MEAN THE PLUG IS GROUNDED.  Just something to consider, an upgrade would cost money but will likely have to be done sooner or later anyway.  

@Emily Senior One thing you’ll want to look at is the cost of insurance. There are providers that won’t touch knob-and-tube. Odds are the remaining providers won’t be won’t be as “budget friendly”. You could find yourself in a situation where are have to think about a payback period where you trade rehab costs for lower insurance.

For what it’s worth, I hope you have had someone look at the plumbing.

@Emily Senior Side note: Your cash-on-cash numbers are likely off. You can’t get a conventional mortgage for a $50K property. It won’t meet mortgage minimums of any bank I’ve run across. So you’ll have...

$193 * 12 = $2,316

$2,316 / $50,000 = 4.6%

Unless you have access to other financing, but that would likely involve points/fees and fees don’t *seem* add up to a ton on a $500K mortgage but would definitely be a high percentage (relative to the debt amount) if you were looking at a 75/25 LTV loan amount of $37,500.

@Emily Senior I’m not sure if this is a deal or not, I just wanted to chime in and say you CAN get financing on a 50k property. My last purchase was 35k, 20 percent down conventional at 5 percent interest . My lender even waived the lender closing fees (1000 dollar value)

Thank you Andrew, I didn't think about not being able to get a mortgage that low, I'll have to check our local banks. We haven't done any plumbing inspection yet but believe me with a house that old if we go into due diligence we're checking EVERYTHING! :)

Thanks Caleb, might be a location based thing, I'll shop around

In general your national banks will have a 50k limit. Look for local banks and credit unions to go under that. I talked to a local bank not so long ago and asked if they had a minimum loan amount and the lady on the phone seemed like she had never even heard of the idea.

Just because there is no ground does not mean it has knob and tube but it is a real good indicator. You should be able to look in the basement or attic and see.

I own a property that does not have the ground in every outlet but isn’t knob and tube. I hand out converter plugs. As long as you have a decent amp service at the main (100 to 150 is common in my area) it’s no big deal. That’s all depending on whether it is knob and tube which is ancient or just older wire that didn’t have a ground.

I would look at the fuse box to see if it has modern breakers and what the main service is. Then I would look around for any knob and tube. (Sometimes people wire it right to new romex) If you find switch operated breakers and no knob and tube go ahead and complete normal due diligence.

As for being a deal that is up to you. Does it meet you criteria for an investment property? Is the CoC return inside you acceptable range?

Oh, thanks Aaron I just saw your comment! In response to you and Johnathan I'll definitely go have a look again and see if I can get into the attic or the crawl space to look for knob and tube. I do know it's old fuses and not breakers but I'll have to check on the amps.

@Emily Senior replacing the fuse box with a breaker box should cost about $600. This would be saved in insurance premiums over time. Outlets are easy to replace with new ones. I would also replace all of the wall switches, especially if you have aluminum wiring. Tight connections are key. 

If you are happy with the rate of return, buy it. Keep in mind, it doesn't have to be Louis Vuitton to be a good rental, so don't over do it. Good luck.

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